Guest Article

(From the September 17, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

BREAKING NEWS: Treasury and IRS Change Position on Applying Combined Plan Limit

A letter from key Members of Congress has prompted the Treasury Department and IRS to reconsider their interpretation of certain changes the Pension Protection Act ("PPA") of 2006 (P.L. 109-280) made to the IRC § 404(a)(7) combined plan deduction limit. Employers that contribute both to defined benefit and defined contribution plans now will be able to take advantage of the 150 percent of current liability limit in 2006 and 2007 as long as their contributions to the defined contribution plan do not exceed six percent of compensation.

Background

Before the PPA, IRC § 404(a)(1) generally set the maximum deductible contribution employers could make to their defined benefit plans at the amount needed to satisfy their minimum funding obligations under IRC § 412. However, employers that sponsored both a defined benefit and defined contribution plan generally were subject to a special combined plan limit for contributions to all such plans, equal to the greater of 25 percent of compensation or the amount needed to satisfy the IRC § 412 minimum funding requirements with respect to the defined benefit plan(s). See IRC § 404(a)(7).

The PPA amended IRC § 404(a)(1) to increase the maximum deductible contribution limit to 150 percent of current liability for single-employer plans for 2006 and 2007. The PPA also amended IRC § 404(a)(7) to provide, in part, as follows:

Most practitioners interpreted this to mean the combined plan limit would not apply so long as the employer's contributions to the defined contribution plan did not exceed six percent of compensation. However, in Notice 2007-28, the IRS took the position that the combined plan limit applies to the employer's contributions to the defined benefit plan even if its contributions to the defined contribution plan are less than six percent of compensation. The IRS's original interpretation thus precludes many employers from taking advantage of the 150 percent of current liability maximum deductible contribution limit for 2006 and 2007.

Recently, legislation was introduced in the House (H.R. 3361) and Senate (S. 1974) to make a series of "technical" corrections to the PPA. One provision of these bills would clarify that the combined plan limit does not apply if the employer's contributions to the defined contribution plan are less than six percent of compensation.

Even though the PPA technical corrections bill has not yet been enacted, the chairmen and ranking members of the House and Senate tax-writing committees, in a letter dated September 11, 2007, asked Treasury and IRS to apply the combined plan limit in accordance with that bill's clarification. The letter noted that Congress is working on moving the PPA technical corrections bill through the legislative process, but cited the September 15, 2007 quarterly contribution deadline and the excise tax on contributions exceeding a plan's maximum deductible contribution limit as reasons for seeking Treasury's and IRS's "assistance" with this issue.

In reply, the Treasury Department and IRS affirmed that it would administer the combined plan limit in accordance with the clarification included in the PPA technical corrections bill "in anticipation of the enactment of this legislation."

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.